The crash I’m referring to is not the meltdown of the financial system, but is a result of that crash failing to happen.
It’s the coming crash in interest rates, which could cut your savings rates drastically unless you act now.
The past few weeks have seen most banks withdrawing attractive fixed-rate savings accounts offers. Top rates today are half a percent lower than before Christmas and they are likely to fall further, so act now to lock in a good rate on your cash.
See below for my round-up of the top longer-term fixed rate accounts.
US interest rates are dropping fast
Two weeks ago the US Federal Reserve slashed its key interest rate by 1.25% to 3%. This attempt to prevent the weakening US economy heading into recession will put pressure on other central banks to cut their rates. The Bank of England is expected to cut its base rate by a quarter of one percent to 5.25% in the next few weeks.
This is one factor which alone would put pressure on banks to reduce the rates they offer on savings accounts. But there’s also another, which is the gradual unwinding of the restrictions that arose from last year’s ‘credit crunch’, when banks became unwilling to lend to each other. That meant that smaller banks could not rely on getting funds from larger banks, so they launched new accounts and aggressively pitched for savers’ money.
A few are still doing so, especially the Icelandic banks. Kaupthing last week joined Landsbanki (which offers two accounts, through Icesave and its UK subsidiary Heritable Bank) in offering an instant access savings account at a high rate of 6.5%. These banks are still under pressure to replace loans from other banks - for which they are now paying higher rates- with deposits from savers. The same applies to many smaller UK banks and building societies.
Down, down, down they go
But those pressures are easing in the UK, hence the sharp reduction in the interest rates being paid since the New Year, especially on longer-term fixed-rate bonds. In November, we had a raft of accounts in our notice and fixed rate savings account comparison tables paying 6.3% or more. Not any more.
Almost certainly longer-term rates will continue to fall for the rest of the year and probably into 2009. So if you have cash you can lock away for a year or two, act now to secure a decent interest rate - by the end of this year I reckon rates could be 1% lower.
Many banks are now promoting very short-term fixed-rate bonds with terms of just a few months. But you gain little benefit from using one of these fixed rate accounts instead of an instant access savings account. If interest rates falls and your bond matures in August, what rate will you get then? Almost certainly a lot less than you get today.
If interest rates are set to go falling - and all the evidence is that they are- then you will do better to lock in an attractive rate for two or three years.
Normal fixed rate savings accounts
| Fixed rate account | Interest rate | Fixed period | Minimum deposit |
| Anglo-Irish Bank | 6.35% | 1 year | £500 |
| Nationwide | 6.25% | 1 year | £1 |
| Northern Rock | 6.40% | to 1/10/2009 | £500 |
| Nottingham BS | 6.40% | to 1/8/2010 | £1,000 |
| Heritable Bank | 6.35% | 2 or 3 years | £1,000 |
Fixed mini-cash ISA rates
For most people, saving in cash ISAs is lockaway money. And if it is going to stay there for a few years, you face the choice of either seeing the variable interest rate drop steadily over the next 12-18 months or staying steady. Switch to a fixed rate now and collect up to 6.2%
Top rates available include:
| Mini cash fixed rate ISA | Interest rate | Fixed rate period | Minimum deposit |
| Nationwide Fixed Rate ISA Bond | 6.15% | One or two years | £1 |
| Northern Rock Fixed Rate ISA | 6.20% | Three years | £500 |
| Leeds BS Fixed Rate ISA | 6.10% | Three years | £1 |
How much safety?
The UK Financial Services Compensation Scheme now covers you for 100% of the first £35,000 deposit with any UK-authorised bank or building society. The limit is per depositor, so a joint account of £70,000 would be covered if it was in the joint names of two people.
